Surprise Support For Dividend Imputation Changes

The ALP’s plan to end the tax free dividend imputation returns to retiree shareholders has won support from a surprise quarter - Sydney analyst Gareth Brown whose Forager Funds group manages $370 million in several groups.

Brown admits that his view on this issue will be controversial (and that he disagrees with what he has called for). To him its all about fairness.

"More broadly, though, it’s fairer. If we’re going to have a tax system, why shouldn’t the full profit stream of successful entities like the Commonwealth Bank, Woolworths, BHP or Forager Funds Management Pty Ltd be subject to corporate tax? Or should it only be wage slaves paying for hospitals, schools, defence and roads?”

"Many of us on the gravy train (which certainly includes me) might disagree. Even if the fairness argument doesn’t appeal, maybe self-preservation will. Scrapping dividend imputation refunds seems preferable to scrapping imputation entirely. And that’s what they’re calling for in some quarters.”

The gravy train is an apt description of the enormous growth in fund managers of all types and sizes, the advance into Australia of overseas giants like Vanguard and Blackrock, looking to grab some of the trillions in the super pool and the tens of billions of cash flow and contributions, and the emergence of millionaires and billionaires (such as the recently retired Keir Neilsen of Platinum Funds Management).

Brown goes on to argue “As a general principle, I think that corporate earnings should be subject to the corporate tax rate at a minimum. That should apply whether those profits flow to shareholders as dividends or are retained by the company and reinvested.

"For one, it would remove a large distortion in our system, one that sees a dollar retained by a company worth less than one paid out to a low-tax rate shareholder. This explains the immense pressure on Australian companies not to cut dividends unless they’re on their death bed. In a sensible world, there’s no such thing as an underwritten dividend reinvestment plan.

"Many of us on the gravy train (which certainly includes me) might disagree. Even if the fairness argument doesn’t appeal, maybe self-preservation will. Scrapping dividend imputation refunds seems preferable to scrapping imputation entirely. And that’s what they’re calling for in some quarters.”

Brown points out that it was a rule change in July 2000 (under John Howard and Peter Costello) that allowed:

“If you are on a lower tax rate, though, the change was significant. If your marginal tax rate was lower than the corporate rate there was, of course, no differential to pay. But, prior to that 1 July 2000 change, there was also no refund of the difference.”

"The rule changes shifted that. Low tax rate investors and, importantly, investing entities get refunded the difference today. The ATO sends you cash. This would be a trivial discussion if we were talking only about a small number of low-income share owners. But Australia’s superannuation system means there is a substantial number of very large savings pools that pay tax rates of 0% or 15%. As a result, the effective tax rate on a large proportion of Australia’s corporate profits is 0% or 15%.

"As a general principle, I think that corporate earnings should be subject to the corporate tax rate at a minimum. That should apply whether those profits flow to shareholders as dividends or are retained by the company and reinvested.”

Steve Johnson was quoted originally as writing this blog, it wasn’t. The author was Gareth Brown of Forager.

Glenn Dyer has been a finance journalist and TV producer for more than 40
years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial
Review, The Nine Network and Crikey.

At the AFR he was a finance
writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network
he was supervising producer of Business Sunday for more than 16 years. He
has also written for other online and analogue print publications here and
overseas.